In a letter circulated internally last week and obtained by The Inquirer, Budget Director Stephen Agostini also asked department heads to submit documents discussing "the potential policy and service impacts" of the reduced funding levels.

That could include how many Police Department positions may have to be eliminated, or a call for reduced library hours.

"The economy hasn't really turned around in the manner we had hoped," Agostini said yesterday. "We are just trying to be prepared so we can start putting together ideas over the next couple of months."

A cut of 7.5 percent would mean a loss of about $39 million in the Police Department's $522 million budget, and a reduction of about $290,000 in the Mayor's Office, which has a budget next year of nearly $3.9 million.

The city's projected budget for the current fiscal year, which ends June 30, is $3.7 billion. And though some spending in that budget may have to be scaled back, Agostini's letter addresses spending concerns for fiscal 2011, which begins July 1.

Already, there are early signs that tax revenue collections will be lower than anticipated. A recent monthly update by the city's financial overseer, the Pennsylvania Intergovernmental Cooperation Authority (PICA), found that city wage-tax revenues for the first quarter of fiscal 2010 declined 4.6 percent over the same period last year. Nearly one-fourth of Philadelphia's total budget dollars come from the wage tax.

At the same time, the report noted that while realty-transfer tax collections continue to fall, they are falling at a slower pace than last year.

"The downward trend in the major tax bases continues to raise concerns about the effect of the recession on city finances, though these trends are not yet inconsistent with the city's [fiscal year 2010] budget assumptions," the PICA report said.

The city's spending could also be significantly affected by the outcome of labor contracts yet to be settled between the city and four unions. The Nutter administration had anticipated saving $25 million this fiscal year and $25 million next year in reduced wages and benefits for union employees.

Agostini's letter begins the 2011 budget process, with individual department responses expected to be submitted to him by Nov. 16. Senior aides are to begin a discussion of those proposals in the first week of December.

The mayor typically delivers his budget address in February or March.